Decreasing Investment Cost

We consider a firm whose profit is only influenced by its own technology choice. There are two differences with the model of Chapter 2. First, it is assumed that the efficiency improvements of the new technologies are known. In practice this does not seem to be a very restrictive assumption. For example, when Intel launched the Pentium processor everyone knew that one day they would come up with a processor that is twice as fast as the Pentium processor. The only thing not known for sure was when this processor would become available. Second, the prices of new technologies are assumed to drop over time, implying that a firm needs to invest less in case it decides to buy a new technology at a later point of time. The reason for this price decrease is that, as time passes, the demand for a particular technology declines because of market saturation and the invention of newer technologies that are better than this particular one.